Performance based contracting is a common technique used in many areas of public and private contracting. Municipality contracted services are usually inefficient when, once a private service provider is in place, the cost efficiency and cost savings of the system come at the expense of its performance. To avoid that, municipalities can put in place a binding contract that articulates robust performance standards. If the contractual mechanisms needed to encourage the right results are inadequate are ever missing, the contract will result in a failure.
In the waste management sector, the performance based contacting is an agreement that through the action of contractually agreed payment mechanism related to defined performance indicators and targets, incentivises the movement of waste management further up the waste hierarchy, and enhances the prospects for improved resource efficiency and the flourishing of a circular economy.
The waste authority establishes a contract with an entity where the payment obligation for each year, including the year of implementation, is either: a) set as a percentage of the municipal solid waste cost savings attributable under the contract or b) guaranteed by the entity to be less than those solid waste cost savings.
Three main characteristics shall be considered in performance-based contracting:
- definition of a series of objectives and indicators to measure contractor performance;
- collection of data on the performance indicators to assess the implementation of the service;
- good or bad performance impacting the contractor (higher revenue or penalties).
Local authorities need to use practical and meaningful indicators in order to monitor their environmental performance, but paying attention to the influence of the variation of external conditions and parameters e.g. economic, social.
Overall, the practice of performance-based contracting eases the implementation of best practices and therefore may result in a better environmental performance. Local authorities through the introduction of specific incentives to the contractor or penalties due to low performance can establish a flexible funding mechanism for ensuring a better performance without adding extra burdens to the public authority. Likewise, local authorities can establish appropriate links between the waste hierarchy and the waste management contracting, by particularly linking part of the contractor revenues directly to the environmental performance.